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How to (Potentially) Circumvent the $10,000 Cap on State and Local Tax Deductions

Under the new Trump tax law, individuals are limited in deducting state and local taxes up to $10,000.  There has been a lot in the news lately about high-tax states trying to circumvent this limitation by establishing state run non-profit organizations that allow state tax credits for contributions to the funds.

By doing so, these states are saying that the contributions are charitable contributions in which the donor also gets a state income tax credit.  Well, great idea, but the IRS recently issued proposed regulations essentially squashing this tactic for individuals…


The IRS did leave the door open for businesses to be able to potentially take advantage of these provisions, thereby allowing a business to make a contribution to one of these funds, take a charitable contribution deduction, and take the corresponding state tax credit.

This is important for sole proprietors and pass-through entities such as LLC’s and S corporations because these charitable contributions and state tax credits will “flow-through” and be used on the individuals personal tax return, thus circumventing the $10,000 cap on state and local tax deductions.

Now, an important caveat to this strategy is that the IRS said that these contributions must be “ordinary & necessary” business expenses (this is a broad general criteria that all business deductions must meet).  What exactly is meant by ordinary & necessary in this context is unclear at this point, but I’m sure we will hear more on this topic in the coming months.

So, what state programs would qualify for this charitable contribution and state tax credit treatment?  Numerous states have these programs that support all sorts of endeavors, from school choice, child care and economic development, so check in your particular state.  In general, you want to make these contributions as early as possible in the year because they have caps on the number of credits that can be given…and they go fast.

Two examples in South Carolina (that are “sold out” for 2018) are the SC Industry Partnership Fund and the Exceptional SC program.

Another option in 2019 might be contributions to Community Development Corporations.  Tax credits for contributions to these entities expired in 2016, but may be coming back in 2019.

As always, with any tax planning advice, be sure to check with your tax advisor for your particular situation.

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